When Eskom CEO Andre de Ruyter suspended the managers of two power stations last week for apparently not doing their jobs properly, it was national news. In most countries, dismissals of this sort would not even have made it onto industry news sites.
A statement from the Eskom board in support of De Ruyter showed he needed high-level back-up for the decision. Clearly, De Ruyter is keen to do a good job, but he is having to tread carefully and his hands are tied on many important decisions required for a turnaround.
That ultimate authority on key strategic and operating decisions lies with the government or Luthuli House. That accounts for much of the reason for Eskom’s slow demise, and that of most of the public enterprises.
Any effort to come up with emergency solutions to load-shedding, lowering costs and raising revenue at Eskom has the potential to run into a political wall. After all, Eskom is a source of immense power and patronage for the government.
Public ownership accounts for much of the reason why Eskom is in a bind, lacks urgency in dealing with the power crisis, and is dragging down the economy. Especially strong political will is required for turning around a public enterprise that has come to sustain deeply vested interests.
Yet South Africa is experiencing immense economic damage from the cost of Eskom’s rule by vested interests. The absence of a reliable power supply constrains economic growth and deters investment. Eskom’s debt is about 10 percent of GDP, 80 percent of which is guaranteed by the State. If Eskom were to collapse, there would be a massive effect on our financial system. Government cannot possibly continue bailing out Eskom without substantial cost, as it diverts resources from more compelling needs, and drives up the fiscal deficit and debt.
This year has seen the most load-shedding yet, despite the Covid-19 economic slowdown resulting in falling demand for power.
Unplanned breakdowns
At the start of last week Eskom said unplanned breakdowns and planned maintenance meant 37 percent of its total nominal generating capacity was out of commission. The government think tank, the Council for Scientific and Industrial Research, recently said it expects five times more load-shedding in each of the next three years than in 2019, which had previously been the worst year for outages.
Much is at stake, but in virtually every decision that must be taken to turn around Eskom, there is a big political cost. That is the nature of the bind. Ensuring lower-cost procurement could mean a political cost to the government, as it could mean fewer empowerment contracts. Capping or cutting wages and layoffs would mean outraging the ANC’s union allies. Further raising electricity prices to raise revenue for maintenance and new investment could drive many heavy industrial users under and could spark street protests. A massive renewables and gas programme would upset coal and other interests. And privatisation could undermine state power and upset party ideologues.
The reforms introduced by President Cyril Ramaphosa earlier this year could be of great significance, if implemented. The far greater scope for independent power producers to sell into the grid and generate for their own use is highly positive. Private producers could now supply the grid to a limited extent and municipalities would not be compelled to buy from Eskom, thereby breaking the Eskom monopoly.The extent to which there will be an urgent supply response must still be tested. There are still restrictions on private producers that could hinder investment, and questions remain about Eskom’s ability to serve the transmission requirements of the new producers.
Far greater private sector involvement
This and the Eskom break-up into generation, transmission, and distribution could pave the way to far greater private sector involvement, subject to derailment by coal and labour interests. In the Integrated Resource Plan, South Africa has a plan for an energy future far more dependent on renewables and gas. Whether this will see a demise of Eskom in favour of a private-sector energy future is doubtful given the ANC’s stance.
South Africa has massive reserves and will remain reliant on coal for years to come. The most straightforward solution is privatisation of power stations, or, at the least, offering contracts for their operation and maintenance. A sell-off of coal-based power stations might be difficult in these environmentally aware times, yet there is always a price. However, these would have to be accompanied by changes in regulation on, perhaps, empowerment, electricity tariffs, and labour laws. The ANC has rejected the privatisation path, clearly tightening the bind in which Eskom finds itself.
There is great urgency to get Eskom out of its dilemma, yet slow government processes do not help. The government says it will announce a preferred bidder for 2000 MW in emergency power in late December, which will be more than a year after the request for information was issued.
Time is running out for the bulk of Eskom’s productive capacity. It has an ageing fleet of power stations that will in the next 15 to 20 years, if not before, have to be scrapped. Their natural life is in the region of 60 years, but neglect and poor maintenance have probably shortened their lives. The two newly built flagship power stations, Kusile and Medupi, have been a disaster and much has to be done to make them fit for purpose.
Longer-term problems
Eskom is severely short of the cash flow needed for maintenance and refurbishment, never mind new power stations. Only now, under De Ruyter, is Eskom aggressively pursuing big municipal customers in arrears, but there are other longer-term problems. Years of frequent load-shedding and high power prices have resulted in defections from the grid and therefore depressed revenue.
Eskom is a high-cost operation due to fraud and much overly expensive procurement. According to the IMF, Eskom has been purchasing coal at significantly above world prices. And over the past 15 years the workforce has risen by 50 percent, along with a real increase in wages over this period by 50 percent, which is well in excess of productivity.
With existing high debt levels, substantial losses, and being unable to service its debt without government bailouts, Eskom cannot raise new capital on a scale required for new investment. Due to its dire financial situation Eskom has had to borrow at a widening spread over the rate at which the state pays.
There have been successful power utilities, but these have a high degree of managerial independence and certainty of good policies. This has turned out to be impossible in South Africa, where public enterprises have been used before, during, and after the period of state capture as a means to extend state power.
Eskom has become unfit for purpose and cannot be allowed to lead the country into its energy future. The world has increasingly abandoned the state-owned model for power utilities. South Africa should follow.
[Picture: Rohan Makhecha on Unsplash]
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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